Was Cash for Clunkers a Success?

Cash for Clunkers is set to end on Monday after burning through $3 billion in less than a month. The government's auto-revitalization program, which gave buyers up to $4500 after trading in their old cars, has moved more than 450,000 cars in the last few weeks. My colleague Conor Clarke, writing at the Daily Dish, says this is a testament to its success. He's right that "good stimulus is timely stimulus," but I think it's wrong to call C4C a success at this point, for a couple reasons.

Leaving aside the program's dubious environmentalist claims (you didn't qualify for a rebate if your old car's mpg was too high, and so on), I think it's likely that we'll look back on Cash for Clunkers as at best, unnecessary, and at worst, a bad idea. Conor writes that the speed with which the money was spent makes this an effective stimulus. From the standpoint of basic Keynesian economics, you certainly don't want your stimulus money spent in a relaxed manner. But the speed with which the C4C money was spent could also be evidence of its needlessness.

As I wrote here, there is overwhelming evidenceof an historic pent-up demand for car purchases -- the average age of our current fleet is at an all-time high -- and it's really quite likely that all we've done is spend $3 billion to make thousands of buyers to move their third/fourth quarter purchases into two weeks. Jeremy Anwyl, CEO of auto information site Edmunds.com, wrote that it's not clear that Cash for Clunkers will increase 2009 sales at all.

Then there's all the unintended consequences of destroying working capital in used cars, which in the halcyon days before C4C, had real value in their twilight years. Used car dealerships watching their potential inventory be gutted by the government. Charities witnessing a 12 percent dip in auto donations. Morgan Stanley economists actually think C4C is hurting hurting non-auto consumption, which fell 0.6 percent in July after rising in June.

What happens to auto demand now? Truly, nobody knows. But from the evidence it seems possible that in six months we'll look back at Cash for Clunkers as a poorly designed program that hurt used car dealerships and charities, suppressed this summer's non-auto retail market and failed to dramatically increase 2009 car sales. The stimulus ended in a flash. Whether it truly stimulated remains to be seen.